What are the feelings of the man who has crashed the market by USD 20 bln?
(Laughing). Let’s not make it personal. This is nothing personal, just business. This man is feeling good and sleeping soundly.
Have your counterparts at PotashCorp called you to ask “what was that?”?
They might have wanted to call, but such communication would be restricted by the regulatory bodies.
During our last meeting in December, you said that the potash market had five or six years of existence left under the traditional‘ price over volume’ formula, whereby everyone would carry on as before. What has changed since? Why has it ended more quickly?
I said that any new players would enter the market only in five-six years’ time. We have not been expecting any material volumes from them before 2018previously, and we are definitely not expecting them now. But the reasons for the change in our strategy were not connected with the activities of new players of course. Frankly speaking, if we could go on living as we have lived before, we would have been glad to do it– that is to proceed with ‘price over volume’ strategy, cooperate with Belaruskali through BPC (Belarusian Potash Company), enjoy high multiples and high margins. What happened was not due to our wishes but due to the circumstances at the time.
It was not a secret that we had certain issues with our Belarusian partners. It became evident last December when the Decree was issued by Alexander Grigoryevich (Lukashenko, president of Belarus – Vedomosti) stating that Belaruskali could export its product not only through BPC but also through traders not affiliated with BPC, and without our agreement on volumes and price. Thus it created a platform for internal competition. For some time it looked like pressure from the Belarusians to get an edge in our internal debates that were happening constantly, but were always of a constructive nature. But from a certain point, the market started to feel that this Decree formed a foundation for concrete actions about to be undertaken by the Belarusian side. It is possible that one of the consequences to it was the unexpected conclusion by Canpotex (trader of the Canadian PotashCorp and the US potash producers Agrium and Mosaic – Vedomosti) of a contract with the Chinese companies in December 2012. I cannot say for sure, but I can assume that this irrational step was caused by concerns that BPC was on the brink of a collapse, and Canpotex had therefore decided to act first. At the time, we managed to control the situation – our shareholders met with the top government officials, and the management team met with the Prime Minister (Mikhail Myasnikovich – Vedomosti) and representatives of Belneftekhim, Belaruskali’s owner.
Negotiations continued at all levels until the last possible moment. We tried to persuade our counterparts thatBPC was a unique project which managed to achieve the leadership position on the market and enabled both Belaruskali and Uralkali to make large amounts of money. But it seems now that our arguments were either taken as bluffing or as empty statements. All that time, we have been asking our partners to abolish the Decree in order to give a clear signal to the market that we were still working together. Unfortunately, it didn ot happen. Throughout June, a Conciliation Commission was working in Belarus. Within the framework of the Commission we were able to agree on almost all issues apart from the key one – renewal of BPC exporting exclusivity and abolition of the Decree. The final decision was to be made during the meeting chaired by the Belarusian President, where the Head of the Conciliation Commission Mr. Rumas was to make a report on that. The meeting did take place on 22 July but the Decree was not abolished. After that, we saw written proposals by various traders offering Belaruskali’s product appearing on the market. So we had a choice – either to stand back and watch the collapse of BPC or to take preventative measures.
Having analysed the situation, we decided to act. The Board of Directors was ready to make this decision. Throughout the preceding months we were informing the Board on what was happening: on the behaviour of our competitors, difficult market environment, and the fact that we were not supported by the markets when trying to increase the price. Therefore, when we have urgently called the Board meeting, the Directors unanimously approved the new strategy, based on the premise that if it was impossible to maximise prices in the existing situation we should maximise volumes. This is very rational for a company like Uralkali, which is an industry leader on production costs, and has an ability to expand production quickly and obvious geographical advantages. Our official statement then followed.
Why did exports outside BPC have such a negative impact? Did they offer lower prices?
The question here is not about price but about a unified trading position. If there is one leading trader, there is an opportunity to hold a tough negotiating stand, and customers cannot make different suppliers compete, trying to gain concessions by bargaining and so on.
But Silvinit (Silvinit merged with Uralkali in 2011 following a change in shareholder structure – Vedomosti), for example, always played on volumes and was willing to make price concessions…
It is one thing when a small company such as Silvinit is playing the market, but quite another matter when Belaruskali acts on its own. Moreover, the market environment is different in 2013 – the minds of the North American producers changed significantly. At investor conferences, they stopped ruling out the possibility that it made sense to change strategy and place more volumes on the market. Unfortunately, those statements were followed by real actions – in H1 2013, BPC lost a significant part of its market share, mainly to Canpotex. This was one of the reproaches expressed to us by our Belarusian opponents. BPC is losing volumes and surrendering its position to Canpotex, is there any sense in sticking to ‘price over volume’ strategy? They were saying: “If BPC does not work properly, it makes no sense to abolish the Decree– on the contrary, we need to launch sales through independent traders to catch up on volumes.” Thus the market was weakened from several angles and we have essentially found ourselves between a rock and a hard place, while still remaining the market leader with a unique competitive edge. So we asked ourselves a question: if we have such strong advantages, why should we suffer financially and face uncertainty? Especially given that the situation on the soft commodities markets and farmer economics were great, and yet even in such a favourable environment we could not achieve high prices, while also being restricted in volumes. So the logical step followed.
Was it a suggestion of the management to declare the new strategy directly and unequivocally, or of any of the shareholders?
Naturally, the management team runs the business, and the shareholders make strategic decisions. We looked at the market and offered the Board of Directors the results of ananalysis of a range of market development trajectories with all the associated benefits and risks, and financial forecasts. Based on this, the Board made a decision. All these options have been discussed before, including at the June strategy session in Berezniki. Therefore, there was nothing majorly new or unexpected for the Board members. Once the market turned negative for the Company, the Board said: “OK, we accept the proposal of the management team and agree that it is time for the Company to change direction, as the old strategy no longer works.”
Investors are not happy with the exit of the shareholders Zelimkhan Mutsoev and Alexander Nesis just before the Company announced the new strategy. There are accusations of insider dealings, and the FCSM is ready to look into this. Is there any chance that the shareholders had access to the inside information?
If we receive any official information requests, the Company will provide comprehensive answers to all the questions. It would be difficult for me to comment on the shareholders’ actions, but there is one thing I can state officially: the management of the company did not provide shareholders with any information, which was not public and open to the financial markets. We can give exhaustive clarifications on this. Mr. Mutsoev did not even have representation on the Board, he was purely a financial investor. As far as I know, he sold his stake because of his decision to continue his political career.
As for Mr. Nesis, the agenda for the Board meeting was formulated in very generic terms, so it would not have been possible to know what it was actually about. There were no additional analytical materials attached to the agenda. Therefore, Mr. Nesis’s representative did not get any information that was unknown to the market from the Company. I would not want to comment on why Mr. Nesis sold his shares, as the reasons were published in the official statements and any further requests should be addressed directly to the ICT Group.
Could any of your shareholders have made bets on your competitors’ shares ahead of the announcement?
I am definitely not the person to ask this question to. I can only assure you that we provided identical information to all major and minor shareholders.
Did you expect such awild reaction? Analysts are calling it “The Black Tuesday” of the potash industry.
We do not consider the market reaction all that wild and inadequate. Yes, everything happened fairly quickly. It is reasonable that investors reacted the way they did as the picture of the potash market has changed substantially. Today we have found ourselves in the situation where the attention should be focused on production costs, and therefore the marginal producers would experience market pressure. I guess that the fact that everything happened in one day was unpleasant. But there was no other way of doing it. The Company made no special announcements; we have just reported that we would no longer export through BPC. After that, we were just answering the journalists’ natural questions. What would the Company do after the exit from BPC? We are not big enough to carry on with ’price over volume’ strategy, so there is no economic logic in it. Therefore we need to maximise revenues in another way– though volume maximisation. One does not have to be a management guru to figure this out. Next question – what would then happen to the prices? We all know how the commodities market works: look at the producers in the market and the production costs of marginal players – these are the guidelines for price changes. My honest answer to the question on how the price is going to change is “I don’t know”. But the trend is obvious. If the volumes are up, the prices might reach the production costs of marginal players, about USD 250 per tonne. So, we might soon see figures like this.
When you were saying that, did you realise that you were changing the market?
Of course we were, we are responsible people. We understand what we are doing and when. In this situation, it was unavoidable. And when something is unavoidable,, it is better to do it quicker to receive the maximum benefit.
What about the idea of joining Canpotex to keep the ‘price over volume’ strategy?
I very much doubt the regulators would have allowed this – too much trading concentration. It’s totally unrealistic. We did not even consider it as an option.
What will the potash market be like after 30 July?
At the moment, it is only possible to talk about the short-term perspective – six to twelvemonths. The Canpotex union will most likely remain, perhaps with a different strategy. There will be an independent player: Belaruskali, which will try to sell actively through various independent traders. There will be K+S and ICL which will continue business as usual. And there will be an independent Uralkali with its new strategy to sell maximum volumes in every market. We expect that everyone will lose out financially: we will see profits reduction, we will also see marginal producers thinking what to do next, - but nothing will happen in the short-term. Then we expect a comprehensive review of the green-field projects. People will need some time to adapt to the fact that it is not a temporary fall out between Uralkali and Belaruskali. Most of the green-field project owners will review their economics and would be forced to close them, writing off their investments. Otherwise, the losses will go up. I think the existing producers will also review their expansion plans. This also concerns Uralkali, which can raise its production to 14 mln tonnes and work at this level for a few years. Other expansion projects will be postponed. But this will still be a breakthrough: basically we will raise our production by 30-40%. This will help to compensate the revenue reduction from the falling price.
We also expect that the demand will grow. Over the past years there has been an enormous market discrepancy: the prices for agricultural products were high, farmers’ economy was great, and yet we saw no growth in demand for potash. Probably one of the main reasons for this was the relatively high price of potash compared to nitrogen and phosphate fertilisers in a complicated macroeconomic situation. We believe that in 2014 the global demand can increase by 10%, up to 60 million tonnes, and in the future it will be able to grow again by 3-4% annually. This will help to stabilise the market in the medium term: most of the green-field projects will collapse –as well as some of the existing players – and the demand will simply increase. For the whole of the last week, the market was concentrating on the negative aspects of what happened – but time will pass and gradually people will begin to make calculations, devise new forecasts and understand that, yes, the new life has begun, but even in the current circumstances there are very few sectors similar to the potash industry in terms of efficiency and fundamentals. Yes, it will be functioning differently but let’s see if you can find another industry in such a good shape. It’s the recovery of the health of the market. I would not take the liberty of stating that we had a great desire to do this. We did it because we were forced to, by the circumstances in Belarus. But given that it has happened this way, we found a lot of benefits for ourselves, and we are going to hold onto them strongly.
Your statement triggered such a negative reaction, among the other things, because there were no road-shows or presentations. Why?
Because the situation was evolving rapidly. There were just a few days to take the decision. There will be a road-show – a traditional two-week event at the beginning of September in North America and Europe where we will be meeting the key investors, and explaining our strategy and what company is going to do in the new circumstances. Usually we do not do this for large groups. And currently I am personally making individual calls to the largest investors, and our IR Department is working 20 hours a day (given the time difference with Europe and the US), and every day the Head of IR is talking with dozens of investors, explaining the situation. Yes, we did not post a presentation for the Board of Directors meeting online – there was nothing to be posted – but, as you can see, we are trying to explain through the media what has really happened.
How are you going to increase the capitalisation of the company now?
If you are asking how are we going to bring the capitalisation back to the same level where it was, for example, in May, then there is no way to do it. It’s unlikely that the market will get back to the previous valuations of potash assets in the short term. The best way to get up after the fall isto ensure the good management of the business that we already have and good execution of our chosen strategy. We have to prove to the market that we are able to produce and sell the larger volumes. We will do it and people will see it in the results of the second half of 2013 already. We have to demonstrate that we are able to control the low cost base that we already have. Everyone should also be able to see it shortly. From the point of view of corporate governance, nothing changes – we were always considered to be a company that is well-governed and we are going to depart from our principles in the slightest. After that, it is just a question of time.
I still have a feeling that your statement is just the first step in the great game. What will happen next?
No doubt, we never make opportunistic steps. We have been working in this business for a long time and we have a long-term strategy – it is rather easy to understand and quite effective, I believe. If the rules have changed, we have to eliminate green-field developments; the producers which do not have a low cost base would deteriorate and shrink. Simultaneously, the demand should be stimulated by the low prices and active promotion of balanced fertilisation. After that, probably, consolidation.
I mean only consolidation in trading, nothing more than that. And not on the basis of BPC. We are not going back to Belarus, but if it comes to consolidation with Belaruskali in another jurisdiction that will provide all further advantages for cheap long-term financing, then it is possible.
Merger with PotashCorp?
It is hard to say. Everything has only just happened. The sea should calm down a bit. The players should re-evaluate the market in general and their individual strategies. After that, negotiations can start and we can see that can be done to create value for our shareholders and for the shareholders of the other party. Consolidation would be a logical step when the price goes down to the level of marginal producers’ cost. But we are still very far from that. We have not looked at this, have not done the calculations, and have not spoken to anyone about it. It is still too early to understand either our own valuation or that of our competitors. The market needs to re-evaluate everything and calm down; the volatility should go down as well. Following that, with a cool head, we can see what the next steps would be.
Have your shareholders informed you of any plans to buy shares of your competitors?
No, but they are not obliged to do that.
Can consolidation of trading mean a return to ‘price over volume’ principle in future?
Certainly, it can. But we are still far away from it.